DP8726 Heterogeneous Information and Trade Policy
|Author(s):||Giacomo AM Ponzetto|
|Publication Date:||December 2011|
|Keyword(s):||Dracula effect, Imperfect information, Media coverage, Pareto inefficiency, Protectionism, Voters|
|JEL(s):||D72, D83, F13|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=8726|
Protectionism enjoys surprising popular support, in spite of deadweight losses. At the same time, trade barriers appear to decline with public information about protection. This paper develops an electoral model with heterogeneously informed voters which explains both facts and predicts the pattern of trade policy across industries. In the model, each agent endogenously acquires more information about his sector of employment. As a result, voters support protectionism, because they learn more about the trade barriers that help them as producers than those that hurt them as consumers. In equilibrium, asymmetric information induces a universal protectionist bias. The structure of protection is Pareto inefficient, in contrast to existing models. The model predicts a Dracula effect: trade policy for a sector is less protectionist when there is more public information about it. Using a measure of newspaper coverage across industries, I find that cross-sector evidence from the United States bears out my theoretical predictions.